How the Financial Term Principal Applies to Loans

A loan is when a borrower receives a sum of money from a lender (called the principal), and agrees to repay the borrowed money to the lender at a later date. Normally the borrowed funds are paid back to the lender in installments, with a lump sum paid at the end of maturity. There are cases such as in an annuity, where equal installments are paid during the life of the loan eventually paying off the loan at maturity. The loan is generally provided to a borrower at cost, referred to as interest on the debt. The interest provides an incentive for the lender to participate in loaning out funds.

In a legal loan, the terms of the agreement are enforced by a contract. Covenants, which are stipulations of the loan, are determined by investor s and how likely they believe the company will be able to return the principal. The more unlikely a company is to repay the debt, the more covenants will be included to protect the investor.

That said, a worthy borrower that has strong cash flow and solid earnings will be provided funds with less covenants attached to their loan offering. On the flip side of that a borrow with a poor credit history who applies for bad credit personal loans will have a much harder time obtaining reasonable loan terms. A loan is just like any other debt instrument, in that, the stronger the creditworthiness of the borrower the better the terms of the deal.

There are many types of loans available to borrowers. Open-ended loans are loans that you can borrow over and over. Credit cards and lines of credit are the most common types of open-ended loans. Closed-ended loans are not able to be borrowed after they have been paid off. When a individual begins to make payments on loans that are closed-ended, the loan balance decreases. Examples of closed-ended loans are student loans, auto loans and mortgage loans.

Secured loans are backed by a pledged asset as collateral for repayment of principal and interest on the loan. If the borrower defaults on the loan, the lender is able to take ownership of the asset and use its value to satisfy the loan. Unsecured loans are not backed by collateral, but financial status. These loans look at creditworthiness and tend to be more tedious to get and carry a higher rate of interest.

Conventional loans are not insured by federal agencies such as Rural Housing Services, the Veterans Administration or the Federal Housing Administration (FHA). Payday loans are typically loans that have a short term with a pledge to apply the upcoming paycheck to serve as collateral for the loan. Payday loans typically have fairly high APRs with a high rate of default. Lines of credit such as overdraft accounts or home equity lines of credit offer an amount that a borrower can extract at any time.

At $3.12 trillion, 2012 global lending saw the 5th highest annual issuance on record, although it was down 16 percent from the $3.73 trillion in 2011 and off 22 percent from the peak $3.98 trillion in 2007. The top lead manager was JP Morgan, accounting for 642 deals and syndicated just over 17% of the deals in the US loan market. The top three industries globally were Consumer, Non‐cyclical, Financial, and Consumer Cyclical which collectively accounted for about 45% of total deal activity year to date in 2012.

The loan market continues to grow, with much of the focus and media attention on student loans and the drastic increase in borrowing. There is a growing concern among students that have already graduated, as they are finding it difficult to pay back their outstanding debt due to the poor job market and health of the economy. Despite these worries the trillion dollar loan market remains strong.